Banks’ Insolvency: Asiama tells judges that adverse court determinations against BoG decisions risk financial instability
Governor of the Bank of Ghana, Dr Johnson Asiama, has said that while the laws on insolvency provide general guidance on the effective implementation of insolvency processes and procedures, they may not always address all possible scenarios.
Thus, he said, judicial intervention becomes essential to address grey areas of the law.
However, Dr Asiama said that the Courts should employ circumspection in the exercise of its discretion in the adjudication of insolvency and restructuring proceedings.
“This is because, in the absence of any findings of breaches of the rules of natural justice and due process, adverse court determinations against administrative decisions of the Regulator in insolvency proceedings have the tendency to create significant legal uncertainties, unwind contractual arrangements (including government interventions), reverse work done by receivers (e.g., asset sales to repay debts) and risk financial instability,” he said when he delivered the keynote address during the Office of the Registrar of Companies sensitisation programme for selected judges of the judiciary at Peduase, Aburi, in the Eastern Region on Friday, October 10.
He further explained that for international best practices on this area, there is the Financial Stability Board (FSB) which coordinates, at the international level, the work of national financial authorities and international standard-setting bodies in order to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies.
Sharing with the judges the Principle 5.5 of the FSB’s Key Attributes for Effective Resolution Regimes (dated 25 April 2024), he said ” It states that: Legislation establishing resolution regimes should not provide for judicial actions that could constrain the implementation of, or result in a reversal of, measures taken by resolution authorities acting within their legal powers and in good faith. Instead, it should provide for redress by awarding compensation, if justified’.
In addition,Dr Asiama stated, insolvency proceedings, unlike many adjudicative processes, is dynamic and require timeliness to achieve utmost effectiveness.
“Delays in the judicial process can lead to a diminution in the value of assets, jeopardise enterprise viability, and have unintended detrimental consequences on the insolvent estate and stakeholders. It is, therefore, critical that the judiciary ensures timely hearings and prompt rulings to safeguard the integrity of the process.”
Dr Johnson Asiama further identified several causes of insolvency in banks and specialised deposit-taking Institutions (SDIs).
The causes include Creative accounting practices that misrepresent financial conditions; Cash and asset suppression; Insider dealings/related-party transactions exceeding statutory limits; Weak board oversight and internal control override; Non-compliance with BoG provisioning norms and failure to implement on-site recommendations; Non-existent paid-up capital or investments in SEC-regulated institutions; Inadequate capital to sustain operations; High management fees paid to related parties; Excessive risk-taking without proper risk management; Poor investment decisions and lack of due diligence; Misuse of depositors’ funds for long-term expenditures, causing asset-liability mismatches; Poor credit underwriting standards leading to toxic assets (e.g., non-performing loans, unrecoverable placements, etc.), and; Use of depositors’ funds to finance related-party projects.
He told the gathering that the importance of the Corporate Insolvency and Restructuring Act (CIRA), 2020 (Act 1015), particularly at a time like this, cannot be overemphasised. The passage of Act 1015 marked a transformative development, introducing a modern framework for aiding financially distressed companies.
The Act, he said, outlines clear conditions for placing companies into administration and defines the key responsibilities of administrators, who work to stabilise companies, and restructuring officers, who develop recovery strategies.
Act 1015 therefore offers significant potential in addressing insolvency situations through effective debt workouts and other restructuring modes. It is a crucial piece of legislation addressing corporate insolvency and restructuring in Ghana.
“We believe that a resilient and robust corporate insolvency regime plays a critical role in strengthening Ghana’s corporate regulatory framework, which is an area in which the Bank of Ghana plays a vital role,” Dr Asiama said.
He further indicated that a strong regulatory framework ensures compliance, protects the public interest, and promotes fair practices across sectors, safeguarding not just financial institutions but the broader economy as well.
Highlighting the Bank of Ghana’s statutory mandate, he said they have the duty to Maintain price stability, Promote economic growth, Ensure the efficient operation of the banking and credit system, and Promote financial stability.
In line with this mandate, he said, the Bank recognises the value of a well-designed insolvency regime.
In addition to Act 1015, the Banks and Specialised Deposit-Taking Institutions Act, 2016 (Act 930), which serves as the primary legislation governing Ghana’s banking sector, provides for: Prudential requirements, Enforcement mechanisms, and Early intervention through prompt corrective actions for distressed banks and Specialised Deposit-taking Institutions.
“The Bank of Ghana takes insolvency seriously and works diligently, through its regulatory and supervisory roles, to prevent Regulated Financial Institutions (RFIs) and Specialised Deposit-taking Institutions from becoming insolvent.
